FireEye should reset investor expectations even lower

Shares of FireEye Inc. tumbled as much as 15% on Friday as investors reacted to the company’s weak quarterly earnings report and at least two analyst downgrades of the stock.

Citigroup downgraded the stock to neutral from buy and reduced its price target to $18 from $22, while J.P. Morgan lowered its rating to neutral from overweight and lowered its target to $15 from $20.

Other price target cuts came from PiperJaffray, which reduced its target to $17 from $20; Nomura, which lowered its target to $22.50 from $26; Deutsche Bank, which reduced its price target to $15 from $20; Wedbush, which lowered its price target to $13 from $16; and Stifel, which cut its target to $24 from $32. Piper Jaffray, Nomura and Stifel all rate the stock the equivalent to buy, Nomura and Deutsche Bank rate the stock at neutral.

Most analysts expressed concerns about FireEye’s
FEYE, -1.08%
fundamentals, which have impacted its ability to make money and widened the company’s losses. Wedbush analyst Steve Koenig said the company’s fundamentals “don’t appear to be turning anytime soon,” while Stifel analyst Gur Talpaz said the only thing that might help the stock at the moment is an outlook so conservative there is no room for misinterpretation or false assumptions of improving trends.

“On the positive side, the company may have reset its FY16 guidance appropriately,” said Koenig. “On the downside, management appears to be pinning its hopes ... on several software platform initiatives that may be too late to matter in a crowded market that is shifting rapidly.”

“Let’s be clear -- despite our positive views on FireEye’s product portfolio, we’re growing increasingly concerned (and frustrated) with the pattern of challenged quarters,” said Talpaz. “We think the best thing that FireEye can do is offer an outlook that factors in no assumptions around improving trends and one that ultimately layers in enough cushion to reduce the possibility of future misses.”

FireEye management blamed the results on changes in the cyber threat landscape, which impacted growth in some of the markets it was previously bullish about. Changes in the types of breaches that affected its customers during the quarter brought down services revenue significantly and impacted tech fees, said FireEye Chief Financial Officer Michael Berry on a late Thursday call with analysts.

Some analysts remain optimistic, however. PiperJaffray analyst Andrew Nowinski said the restructuring plan that includes axing 9% of total costs, as well as new cloud-based products expected to soon hit the market, might help to reinvigorate revenue growth in fiscal 2017.

Shares of FireEye tumbled more than 15% to around $14.14 on Friday, pushing the stock down nearly 10% in the past three months and 68% in the past year. The stock has vastly underperformed the S&P 500, which is up 6.2% in the past three months and 3.7% in the past year.

The average rating on the stock is the equivalent to buy, while the average price target of $19.34 implies 37% upside from Friday morning trading prices.

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